In July 2010, the UN general assembly proclaimed access to safe drinking water and sanitation as a human right. At the same time, water and sanitation are also economic goods (Dublin principal no. 4). There is a need to get a balance of these two aspects of water. Pricing water fairly and equally is important to sustain and extend the water and sanitation system. In many countries, consumers pay too little for water services. Revenue from water charges does not even cover operation and maintenance of water utilities. Water pricing is an important economic instrument for improving water use efficiency, enhancing social equity and securing financial sustainability of water utilities and operators. (Ricato 2012) Another widely used economic instrument are subsidies. (Waelti 2012)
Free water dilemma
If water is free of charge, the water provider does not receive sufficient payment for its services. Consequently, the provider is not able to maintain the system adequately, and, hence, the quality of services will deteriorate. Eventually the system collapses, people have to drink unsafe water or pay excessive amounts of money to water vendors, while wealthy and influential people receive piped water directly into their houses, at subsidized rates. Thus, the water-for-free policy often results in powerful and rich people getting water cheaply while poor people buy water at excessive rates or drink unsafe water. Hence, water pricing is an important instrument to break the vicious circle of the “free water dilemma”. (Savenije & van der Zaag 2002)
Why do we need the economics of water pricing?
- Economics is the science of managing scarcity
- Economics can explain why free price-driven markets fail and water-related problems occur
- Economics can explain how problems can be solved
- Economics can show how prices can be designed to meet different societal objectives and criteria